Arizona Revocable Trusts 101
Arizona revocable trust laws provide that a revocable trust is a written agreement between the Grantor, also known as the Trust Maker, and the Trustee, the management person under the Trust. The revocable trust is one of the three major estate planning tools, alongside wills and probate. The revocable living trust is one of the most popular estate planning tools in the state of Arizona.
Generally, the main function of a typical revocable living trust is for tax planning, status monitoring, disability planning and transfer title planning. Most revocable trustmakers recall back to spending hours looking through their paperwork, forcing themselves to make critical decisions in minutes while their family starts to wonder what will happen after the family member passed away . Once the revocable trust is created, however, there is no need for such decision making since the revocable trust allows the successor trustee to make those critical decisions before the Grantor dies. The revocable trust also operates in some circumstances by disability of the Grantor. In cases where the Grantor was the sole owner of a bank account, then the bank account passes to the revocable trust and the successor trustee would make the decisions concerning the revocable trust when the Grantor becomes disabled or incompetent. Lastly, the revocable trust provides a very simple method of transferring title of property into the revocable trust.
How Arizona Revocable Trusts Function
In Arizona, the grantor of the trust is the person who creates the trust. In a revocable trust, the grantor is generally also the trustee of their trust during their lifetime. This means that the grantor still has control over the assets that they transfer to the trust. While acting as trustee, the grantor can still place the assets into and out of trust and manage their trust assets just like they do now to pay bills, buy property, and so forth. The trustee of the trust is the person or organization that manages and administers the trust. The trustee has the ability to control the assets in the Trust, which includes complete control of the property in the Trust. The trustee gathers up all of the assets that belong to the trust, including stocks, bonds, and real property. The beneficiary is the person who is entitled to receive the benefit from the trust. The beneficiary can be a person, a group of people or a charitable organization. The beneficiary can be either a current beneficiary or a future beneficiary. A current beneficiary will receive the benefit from the trust during the lifetime of the grantor of the trust. A future beneficiary will not receive the benefit from the trust until sometime after the death of the grantor.
As explained above, if the Estate Planning Documents are drafted properly, the grantor will be the trustee of their trust during their lifetime. However, upon their death, a new trustee (or co-trustee) can manage the Trust property. The role of the trustee shifts away from the individual and to an entity such as an adult child or financial institution. The successor trustee will be in place after the death of the grantor and will make sure the Revocable Trust is funded and that the assets are administered, if necessary.
Establishing a Revocable Trust in Arizona: Requirements
When setting up a revocable trust, certain legal requirements must be met to establish the trust in compliance with Arizona Revocable Trust Laws. First and foremost, the trust must be in writing and signed by the trustor, who is the individual creating the trust. Typically, a trust is established as part of an estate plan and is signed by the trustor during the estate planning process. Arizona law states that a trust does not need to be in writing if the trust property is worth less than $2,500.
Once the decision to establish a revocable trust has been made, the estate planning attorney will help you draft the trust document and your other estate planning documents. Arizona law does not have a specific format for the content of a trust. However, a properly drafted trust must include a descriptive name of the trust, appoint a trustee, and identify the assets to be put in the trust. In most cases, the trust will become effective immediately upon creation and can be changed at any time.
Each revocable trust has several key components. First, there are the parties to the trust, including the trustor (creator) of the trust, the trustee (often the same as the trustor), and the named beneficiaries of the trust. The second part is the trust property itself. This includes any real estate or other assets that are named in the trust document. The third and final part is the trust beneficiaries, which are the parties who will receive the trust’s assets once the trustor passes away. In many cases, the beneficiaries are friends or family members of the trustor, but a trust can also have charitable beneficiaries.
Pros and Cons of a Revocable Trust
As beneficial as a revocable trust may be at first, there are pros and cons to consider for Arizona residents.
Pros of Arizona Revocable Trusts
A revocable trust provides an excellent avenue to help you deal with your property while you are still alive. A revocable trust gives you the legal right to amend the trust or cancel the trust at any time during your life. As long as you, the trust grantor, live, a revocable trust has no impact on your ability to control your assets and business affairs. The revocable trust can also cut down the costs and delays associated with the probate process, which can become especially expensive if you have real estate holdings in more than one state, such as Arizona and California. Revocable trusts can also provide you with other beneficial ways of addressing the management of your real estate property. Revocable trusts can allow you to transfer your real estate into the trust to protect it from creditors and predators.
Cons of Arizona Revocable Trusts
Revocable trusts provide for neither federal nor state estate tax avoidance. You continue to pay taxes on the property in the revocable trust as if you had not created the trust. When you die, you report the value of the property in all revocable trusts as part of your estate. Because you have a legal right to change or cancel the revocable trust at any time, a revocable trust does not provide you with asset protection. Finally, if you remain the registered owner of your house with the County Treasurer in Arizona, and the County Assessor, if you own investment real estate such as rental properties, you still will need a power of attorney so you can make your real estate property transfers and sign contracts and negotiable instruments.
Arizona Revocable Trust vs. Will
Revocable trusts and traditional wills are two separate estate planning instruments that can accomplish the same goals. A revocable trust is a legal entity that holds investments and/or real estate. The person who sets up the trust keeps control over all the investments in it during his or her lifetime. When the revocable trust owner dies, the assets it owns transfer to the people the owner designated as beneficiaries after his or her death. Unlike a will, a revocable trust does not have to go through the probate process in order for the beneficiaries to receive the assets it holds.
A revocable trust is often a good option for individuals with substantial assets, as it can make distributing the assets on the owner’s death much easier and therefore less expensive. An individual who owns a house or other real estate that would be difficult to sell or transfer can simplify the process for his or her heirs by moving the property into a revocable trust. However , less wealthy individuals or those who have few, if any, complicated assets may do just as well with a will and avoid the expense of unlocking the assets in a revocable trust.
Revocable trusts require a significant amount of work while they’re being created, so for a person who is just starting out in life, a will may be a better choice. A will is often significantly less expensive than a revocable trust. Another important thing to keep in mind with regard to revocable trusts is that they are subject to the same estate tax restrictions as wills. A California couple who owns (with their son) a home with a fair market value of $2 million might be subject to a federal estate tax, just like a couple worth $2 million.
Nonetheless, in recent years trusts have been gaining in popularity in California. There are a number of reasons for this shift, including the increase in personal wealth and the increased availability and decreasing cost of legal advice on creating trusts.
Arizona Revocable Trust Tax Implications
In terms of tax considerations, Arizona revocable trusts are not a lot different from revocable trusts in other states. Generally speaking, revocable trusts do not retain taxable income and are treated as pass-through entities for tax purposes. Because the income generated by the trust is considered as personal income, revocable trusts do not typically file federal or Arizona tax returns. Instead, the income generated by the revocable trust will be reported on the personal income tax return of the responsible party (usually the creator of the trust).
In certain cases, fiduciaries (trustees) of irrevocable trusts may have to file income tax returns on behalf of the trust. These types of returns will generally be filed if the trust meets certain filing thresholds. If financial institutions make deposits or withdrawals on behalf of the trust, the financial institution may require that fiduciaries provide a copy of the tax returns that the trust has filed.
Revocable trusts are subject to the state income tax of the grantor’s state of residence. This means that if your revocable trust generates taxable income, you will pay taxes on that income to the state of Arizona ( … assuming you reside in the state full-time). If you are a non-resident tax filer, however, Arizona laws prevent non-resident fiduciaries from filing Arizona non-resident income tax returns if the only source of income generated by the trust is from within the state. In these cases, the income generated by the trust will be exempt from non-resident taxation.
Busting Myths About Arizona Revocable Trusts
Common misconceptions about Arizona revocable trusts are probably the biggest point of confusion for potential new clients. Some of the things that they think are true are not and it can lead to serious problems. An example of this is the belief that revocable trusts are simply less expensive wills. Actually, that is not true. When you compare a revocable trust with a will, you can see that revocable trusts can save you time and money in several ways.
If you have a will, when you pass away, the property goes through probate and the executor and probate attorney will have the duty to notify the beneficiaries and the creditors of the person who passed. This includes the Arizona Department of Revenue and the IRS, among others. A revocable trust, however, has no requirement that the trustee notify everybody. If you have a well-drafted revocable trust, the trustee has no duty to notify anybody of anything.
Other misconceptions that people have is that a revocable trust has all the same terms as a will. This is not true. A will can be revoked by the testator with no notice to anybody. The Arizona Probate Code governs what happens to a revoked will. A revocable trust is a private document that does not have to be filed with the court. There is no law governing how a revocable trust can be revoked and what happens to the remaining assets. These are governed by the terms of the revocable trust. People often mistakenly believe that when they change their revocable trusts that it is legally equivalent to a will. This is not true.
Another misconception some people have about revocable trusts is that the revocable trust is a successor agent under a medical power of attorney. That’s not true… at least not in Arizona. In other states, a durable power of attorney may be able to delegate authority to a successor agent, who will then exercise the powers on behalf of both themselves and the principal when the principal is incapacitated. In Arizona, authority does not transfer to a successor agent. It passes automatically to the agent and, if they cannot serve, then they are not authorized get information regarding a principal’s medical condition.
An area where a lot of people are confused about revocable trusts is whether long-term care costs are affected or whether triggering a health crisis will disrupt the revocable trust. To answer this, you need to take a quick look at the way the social program works in Arizona and many states. Arizona is a Medicaid "spend down" state. That means that when you go into long-term care and need assistance with day-to-day activities, if you have assets to pay for that care, you will be required to spend down those assets on your care. Once you have exhausted your resources you may then apply for the Arizona Long Term Care System (ALTCS), which is the state’s version of Medicaid.
As you can see, there’s a lot of common misconceptions about revocable trusts. The bottom line is this: Just because everybody says something is true does not make it true. Therefore, it is important to get consult a qualified attorney to ensure that you are making good decisions for your family.
Altering or Terminating a Trust in Arizona
Prior to the enactment of the Arizona Trust Code, the modification or revocation of an Arizona revocable trust could only be accomplished by a formal judicial proceeding in the form of either a petition to interpret or modify a trust or a petition for the reformation of a trust. The case law leading up to the enactment of the Arizona Trust Code also distinguished between (i) pre-mortem trust modifications and (ii) trust modifications enacted following a settlor’s death or incapacitation. However, the Arizona Trust Code significantly simplifies the steps necessary for a settlor to modify or revoke an Arizona revocable trust.
Trust modifications before a settlor’s death or incapacitation require a settlor to comply with generally the same processes as for establishing a trust in Arizona. In this regard, A.R.S. § 14-10403 permits a trust to be modified in one or more of the following ways: (1) by complying with the method for revocation as provided in the trust instrument or (2) if there is no such method provided for in the trust instrument, (A) a later will or codicil that specifically refers to the trust or (B) a signed writing executed by the settlor evidencing the settlor’s intent to revoke or modify the trust or trust instrument.
Pursuant to A.R.S. § 14-10404, trust modifications pursuant to A.R.S. § 14-10403 do not retain any testamentary capacity and therefore revocable trusts may now be modified without additional formalities. Prior to the enactment of the Arizona Trust Code , the common law required that a settlor comply with the formalities necessary to create a trust in order to later modify the trust. In other words, any executed instruments that were executed by a settlor to modify a trust had to comply with the formalities necessary to create a trust, including witnessing and notarization requirements. This meant that if a settlor’s intent was to modify the trust by signing a resignation letter or a letter to the trustee requesting a leave of absence, it would have been necessary for the settlor to revoke the original trust and create a new trust that conformed to the requirements of A.R.S. § 14-10403 in order to modify the trust.
Trust modifications after a settlor’s death or incapacitation require that a "clearly identified" beneficiary of a revocable trust petition the court to reform, modify or terminate the subject trust with the understanding that the modification will take effect on the date of the settlor’s death. The following procedures must be followed:
The above steps require that the trustee must provide comprehensive notice to all parties interested in the modification. If all interested parties execute a written waiver to the notice requirements, then the actual notice requirements may be waived.
Arizona now provides significantly simplified requirements for Arizona trust modification. The simplified requirements represent a complete sea change for modifying an Arizona trust and help facilitate the intent of a settlor to modify the terms of his or her estate plan without the need to resort to a court proceeding.